Sep 19, 2023Liked by Peter Nayland Kust

"As I have commented on more than one occasion, inflation and deflation represent economic distortions which are themselves exemplars of economic harm."

Why? Seems to me that mild deflation over long term should be the natural order of things as technology increases productivity and reduces the cost to produce all manner of goods.

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A lower price is always a benefit to the consumer. There is no question about that.

Because the consumer always applies downward price pressure, in a competitive market striving for technological improvement in product and production process, as well as efficiency by other means, will generally produce more product for less cost, and resulting in less cost being passed on to the consumer. This much is simple math: lower the marginal cost to produce something and you lower the marginal price charged for that something.

The devil is in the details--in particular, what is best for the consumer is not always best for the supplier.

Consider two examples: cars and computers.

If we take the period 2005-2008, we see that prices both for personal computers and new vehicles trended down. Significantly down, in the case of personal computers.


Yet the headline CPI at the time did not show signs of a long-term decline

Moreover, when you look at company profits for these two industries, the computer industry did fairly well, but automotive did not.


This is what happens when you have deflation vs productivity gains.

As Milton Friedman argued in the 1960s, inflation (and thus deflation) are fundamentally a monetary phenomenon. The simplistic view of both inflation is too much money chasing too few goods; reverse that for deflation. More precisely, however, inflation occurs when people hold more money than they desire and seek to spend the rest, while deflation occurs when people hold less money than they desire and spend less as consequence.

Thus in both the inflation and deflation scenario there is an artificial change in immediate levels of demand--up for inflation, and down for deflation.

This is the distinction to be drawn between deflation and the productivity gain scenario.

Which brings us back to the two sectors of cars and computers. Both had declining prices 2005-2008. However, computer firms had generally increasing profits over that time period, while automakers in this country were bleeding red ink.


During the Great Financial Crisis, you may recall, GM and Chrysler were bailed out by the government, as the US auto industry when through a period of significant turmoil, in large part because domestic auto production in the US had been declining since at least the early 1990s.


This is the problem with deflation. With productivity gains, such as in the computer industry, buyers and suppliers benefit. With deflation, such as in the auto industry, suppliers hurt.

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You state 2023 may prove to be the year China runs out of road. Don't know if you have seen this video. but several substacks have linked it today: Don't Be Surprised by China's Collapse || Peter Zeihanhttps://www.youtube.com/watch?v=mqA5NODRnQI&feature=youtu.be

Was wondering what your take might be on this. Linking your article today @https://nothingnewunderthesun2016.com/

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Had a chance to watch that particular episode.

As is his normal predilection, he takes a rather apocalyptic view of China's situation, and I am not entirely convinced that the magnitude of the crisis is as he makes it out to be.

That being said, I have considered China to be the "Sick Man of Asia" for years.


And even before 2020 and COVID, it was obvious to anyone with a basic grasp of demographics that China was heading for a demographic disaster that it could not longer avoid.

Even before COVID, China was losing manufacturing to India and Southeast Asia, and their labor costs were no longer the cheapest (China reached the Lewis Turning Point around 2012).

Peter Zeihan anticipates that the collapse in China will happen so fast that the rest of the world will literally find itself in a situation where product will just simply stop flowing from China and there will be no good substitutes readily available. While that's not impossible, it's a scenario that requires a number of assumptions just for coherence, and that limits its credibility.

Is China even facing imminent economic "collapse" or simply Japanification? That is an excellent question. At the moment I lean towards the Japanification scenario, primarily because I do not see China has succumbing to political unrest just yet.

Even if China does succumb to political unrest, because China imports significant amounts of food, if the CCP is toppled, the Chinese people will have to either very quickly craft a new polity (unlikely), or allow outsiders to come in an prevent a famine. In that second scenario, among other things that outsiders will provide will be technical expertise to sustain China's manufacturing base (enlightened self interest will apply).

Even if the famine scenario occurs, the shredding of the fabric of Chinese society will make it easy for Europe's Great Powers (including, potentially, Russia, depending on the timing) to re-enter the country in a replay of the 19th century's Unequal Treaties. Which means that Chinese factories are likely to be run by European and American technicians at some point.

This much is clear: complete societal collapse in China benefits no one. Everyone has a vested interest in at least providing a veneer of social stability while whomever holds power figures out what comes next. If the deterioration proceeds far enough, I anticipate a multinational force (military and political) will come into being and effectively take over, guiding China to a softer landing than would otherwise be even conceivable.

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Guess I wasn't expecting a possible substack post in reply, but it would make a good post!!!

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Haven't seen it yet but I do often listen to what Peter Zeihan has to say. He's greatly overrated as a geopolitical thinker, but he is not completely off base like many of the members of the corporate chattering class.

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How come deflation and inflation occur in opposite patterns to what I would want.

This is me speaking as a regular consumer living on a fixed income (damn it feels good to say it finally when everybody's income is well and truly 'fixed').

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